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What were the key takeaways from Oaktree Specialty's earnings call?

- **NII growth and dividend stability**: Q4 NII of $0.40 per share (up 8.1% QoQ) supports $0.40 dividend, with plans to offset lower rates through leverage and nonaccrual resolution.
- **Portfolio diversification and yield**: 88% of new investments in first lien loans, 40% of portfolio companies marked up 70 bps, and 83% of debt investments in first lien senior secured debt.
- **Market dynamics**: Spreads stabilized at SOFR + 450, with disciplined PIK usage (6.4% of income) and selective deal flow.
- **Leverage and liquidity**: 0.97x leverage ratio (target 0.9x-1.25x), $695 million liquidity to support deployment.

**【CEO Summary Section】**
- Adjusted net investment income (NII) for Q4 2025 was $0.40 per share, up from $0.37 in Q3, driven by normalized prepayment fees, higher dividend income, and lower interest expense.
- Nonaccruals decreased to 2.8% of the portfolio (fair value basis) at year-end, down 20 basis points from Q3 and 100 basis points year-over-year.
- Board approved a $0.40 per share dividend, consistent with Q4 earnings, with plans to offset lower base rates through increased leverage, JV optimization, and nonaccrual resolution.

**【Market Environment Commentary】**
- Private credit deal flow showed modest improvement, with mixed quality and increased dual-track financings in the broadly syndicated market.
- Spreads stabilized at SOFR + 450 post-Fed rate cut, with cautious optimism on price discipline.
- PIK usage remained disciplined at 6.4% of total investment income, focused on high ROE projects.

**【Portfolio & Investment Activity】**
- New funded commitments reached $220 million (QoQ +54%), with a 88% allocation to first lien loans.
- Notable investment: $2.5 billion FILO for Walgreens Boots Alliance at SOFR + 700 with 2.5% OID, reflecting complex deal execution capabilities.
- Portfolio yield on debt investments was 9.8%, with 83% in first lien senior secured debt.
- Over 40% of portfolio companies saw markups of ~70 basis points, driven by improving fundamentals.

**【Financial Results】**
- Q4 NII was $35.4 million ($0.40 per share), up from $32.5 million ($0.37 per share) in Q3, supported by higher prepayment fees and lower borrowing costs.
- Weighted average cost of borrowings decreased to 6.5%, with leverage ratio at 0.97x (target range 0.9x-1.25x).
- Liquidity of $695 million (including $80 million cash and $615 million undrawn credit facility) supports capital deployment.

**【Q&A Highlights】**
- Q4 2025 investment activity expected to remain steady, with no outsized repayments anticipated.
- Spread tightening in Q4 driven by market competition, with selective deployment strategy.
- Nonaccruals in healthcare/pharma sectors reflect long-standing operational workouts, with no near-term resolution.
- Walgreens deal's high spread (SOFR + 700) unlikely to repeat in Q4, but pipeline includes potential complex deals.


Oaktree Specialty Lending Corporation (OCSL) Q4 2025 Earnings Call Transcript

- **NAV and Dividend Stability**: NAV up slightly, $0.40 dividend approved amid 0.93x leverage and $730M liquidity.
- **Market Resilience**: Middle-market spreads at SOFR +425-475bp, with asset-backed and European opportunities.
- **Portfolio Strength**: Nonaccruals down to 9% (from 10%), $25.7M Mosaic recovery, and first lien deals at 9.1% yield.
- **Financial Discipline**: 6.6% WAC, $3.9M one-time costs, and JV ROE of 10.5%.
- **Growth Catalysts**: $730M dry powder, pipeline diversification, and rating agency support for leverage expansion.

**【President's Overview】**
- NAV increased slightly, with adjusted NII of $0.37 per share, down due to refinancing costs and lower nonrecurring income.
- Dividend of $0.40 per share approved, supported by balance sheet strength (leverage at 0.93x, lowest in 3 years) and $730M liquidity.
- Refinancing reduced interest expense: amended credit facility lowered rate to SOFR +1.75-1.875%, replacing higher-cost ABL.

**【CEO Market Commentary】**
- M&A activity muted; lending focused on refinancing, with CLO issuance pulling deals into broadly syndicated market.
- Private credit spreads tightened but remain attractive vs. liquid credit. Middle-market spreads at SOFR +425-475bp, core/middle at +25-50bp higher.
- Opportunities in asset-backed, life sciences, Europe, and Asia. Credit quality stable, with risks tied to company-specific issues.

**【Co-CIO Portfolio Update】**
- New investments: Draken Intl (SONIA +550bp, $31.9M) and Lyons Magnus (SONIA +450bp, $12.7M), both first lien.
- Nonaccruals improved: -1% as share of fair value (10% → 9%), with Mosaic recovery ($25.7M) and Telestream exit.
- Pipeline remains robust, with focus on mature, cash-generative businesses and diversified industry exposure.

**【CFO Financial Results】**
- Q3 NII: $32.5M ($0.37), down 16% vs. prior quarter due to $3.9M one-time financing costs and lower nonrecurring income.
- Interest expense: 6.6% WAC, down from 6.7%. Leverage at 0.93x, near low end of 0.9-1.25x target.
- JV performance: $442M in broadly syndicated loans, 10.5% ROE, 1.3x leverage.

**【Q&A Highlights】**
- Spread achievement: mid-500s via lower spreads, life sciences, European deals, and refinancing premium.
- Leverage strategy: target midpoint (1.075x), with plans to deploy $730M liquidity and reduce nonaccruals.
- Dividend confidence: Board approval reflects normalized earnings, with visibility into repayments and asset redeployment.
- Asset-backed focus: equipment receivables, telecom/fiber optics, avoiding consumer unsecured debt.

Oaktree Specialty Lending Corporation (OCSL) Q3 2025 Earnings Call Transcript

- **Challenges Persist**: Q2 NII down 15% to $0.45/share due to non-accruals and rate cuts, despite $100M+ repayments.
- **Portfolio Restructuring**: 4.6% of portfolio on non-accrual, with 50%+ recoveries in Mosaic and Avery sales.
- **Market Caution**: Tariffs and high rates slow M&A, but Oaktree remains active in >$150M EBITDA direct lending.
- **JV Outperformance**: 10.6% ROE vs. 10.2% Q1, potential to expand if credit spreads widen.
- **Leverage Optimization**: Net leverage at 0.93x (low end of target range), $1.1B dry powder for selective deployment.

**【Matt Pendo: Performance Overview】**
- Adjusted NII: $39M ($0.45/share) vs. $45M ($0.54/share) Q1, driven by non-accruals and lower reference rates.
- NAV: $16.75/share (-5.1% QoQ) due to $13M write-downs on 4.6% of portfolio on non-accrual.
- Dividend: Base $0.40 + supplemental $0.02 (total $0.42), aligned with new policy.
- Capital Structure: Refinanced $200M 2025 bonds into 2030 notes, reducing interest rate by 25-125bps.

**【Armen Panossian: Portfolio & Market Update】**
- **New Non-Accruals**: 
  - Mosaic (76% markdown post-50% repayment)
  - SiO2 (69% markdown despite new contracts)
  - Dialyze (76% markdown, <1% of portfolio)
- **Investment Activity**: 
  - $407M deployed in 32 deals (84% senior secured)
  - Notable loans: Vantive ($61M) & Barracuda ($15.5M)
- **Market Trends**: 
  - Tariffs slowing M&A and capital deployment
  - Larger, diversified borrowers preferred (median EBITDA $158M)
  - Liquid credit exits slowed to $279M Q2 vs. $512M Q1

**【Chris McKown: Financial Details】**
- **Income Statement**: 
  - NII: $38.7M (-15% QoQ) due to lower interest income
  - Total investment income: $124.3M (-8% QoQ)
  - Interest expense: $34.4M (-10% QoQ) from rate cuts
- **Balance Sheet**: 
  - Net leverage: 0.93x (low end of 0.9-1.25x target)
  - Liquidity: $1.1B (cash $98M + undrawn credit $1B)
  - JV performance: 10.6% ROE vs. 10.2% Q1

**【Q&A Highlights】**
- **Market Strategy**: 
  - Focused on >$150M EBITDA borrowers with tariff resilience
  - JV leverage may increase if public credit volatility persists
- **NII Run Rate**: 
  - Current $0.45/share is stable, but deployment pace uncertain
  - JV returns could expand to 11-12% if spreads widen
- **Tariff Impact**: 
  - 2025Q2 too early to assess, but 2025H2 earnings at risk
  - Proactively selling tariff-exposed liquid credits

Oaktree Specialty Lending Corporation (OCSL) Q2 2025 Earnings Call Transcript

- **Strategic Reinvestment**: Oaktree's $100M equity purchase at 10% premium signals confidence, adding $200M+ deployment capacity. 
- **Fee Structure Reset**: Permanent total return hurdle caps fees, aligning incentives with long-term performance. 
- **Stable Dividend Policy**: $0.40 base + 50% excess allocation to supplements provides stability amid market cycles. 
- **Portfolio Resilience**: 82% first lien, 5.4x median leverage, 2.1x interest coverage highlight credit quality. 
- **2025 Growth Catalysts**: $2T+ PE dry powder, declining rates, and regulatory tailwinds set up for active deal flow.

**【Strategic Actions Overview】**
- Oaktree purchased $100 million of OCSL common stock at a 10% premium to market price, increasing NAV by 7%. 
- Introduced a total return hurdle for Part 1 incentive fees with a 12-quarter lookback period by FY2027. 
- Waived $6.2 million in Q1 Part 1 fees under new structure. 
- Implemented base + supplemental dividend policy: $0.40 base + $0.07 supplemental Q1 2025, with ~50% of excess NII allocated to supplements.

**【Portfolio Performance】**
- $2.8B portfolio at 10.7% weighted average yield, 82% in first lien. 
- 3.9% of portfolio on nonaccrual (Dominion Diagnostics, Dialyze), with $62M in restructured assets. 
- 50%+ of portfolio companies have >$100M EBITDA, 2.1x interest coverage.

**【Market Outlook】**
- 2025 expected to be active with $2T+ PE dry powder, improving deal flow. 
- First lien lending at 9-10% yields seen as attractive vs. junior risk. 
- Fed rate cuts may ease borrowing costs but rates unlikely to return to pre-2022 lows.

**【Financial Results】**
- Adjusted NII: $45M ($0.54/share) vs. $45.2M ($0.55) prior quarter. 
- NAV: $17.63 vs. $18.09 prior quarter. 
- Net leverage: 1.03x (down from 1.07x). 
- Liquidity: $1.1B (including $100M new equity).

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